January 2017 Market Update

It was a year of surprises. Who would have thought at the beginning of 2016 that the Cubs would win the World Series; that Donald Trump would be elected President; or that the Dow Jones would be flirting with 20,000 within the span of twelve months?

The Cubs started the season with a strong line-up and a lot of buzz. But how many people really believed they could go the distance and win a championship that had eluded them for more than a century? Donald Trump was regarded by most serious observers of the political scene as little more than a joke, a vanity candidate who was more interested in boosting his visibility than being leader of the Free World. Few people thought he had any real chance of winning, a belief that persisted right up to the moment his victory could no longer be denied. As for the stock market, it started the year in a funk. After a dismal January, it recovered only gradually through the spring, and then staying in a relatively narrow band until after Trump’s victory.

So, what do we make of the events of the past year, and what do they portend for 2017 and beyond? Presidential transitions are always accompanied by some degree of uncertainty and risk, particularly when control of the White House shifts from one party to the other. But this transition seems particularly fraught with uncertainty, due in part to the unpredictability of the President-elect and in part to the sea change a Trump presidency represents after eight years of Obama.

For now, the markets are clearly enthusiastic about the changes that may be coming. These include tax cuts, reduced regulation, infrastructure investment and the end of divided government that has long characterized Washington.

But there remains a lot that is unknown, and of potential concern. Trump remains more opaque than any recent past president, preferring to Tweet than talk. When he does talk, it is to adoring crowds in his “thank-you” tours. He both avoids and vilifies the press, restricting access to just a few friendly journalists. His positions on Russian interference in the November elections is baffling, as is his admiration for Russian President Vladimir Putin. He has already managed to rankle China over his phone call with the Taiwanese President. All this before he has even taken the oath of office.

This political landscape makes predicting the course of next year nearly impossible. A best-case scenario assumes he will boost the economy by lowering corporate taxes, cutting regulations and implementing a well-executed infrastructure investment program. A worst-case scenario could be a diplomatic conflict that turns into a trade war or even a military confrontation. China and the Middle East would seem to be the most likely spheres where such a scenario plays out. But smooth sailing with our European and Latin American allies cannot be taken for granted. As for Russia, the Trump-Putin relationship may be good now, but will it remain so? Russia has rarely been more openly hostile to the West than it is today. What Putin chooses to do once Trump is in the White House may be the greatest uncertainty of them all.

One thing is certain. There will be a new normal, and it will not resemble what we have become accustomed to over the past eight years. This may prove to be a good thing, or it may not. While we are waiting to find out, I wish everyone a very Happy New Year and hopes of a Cubs repeat in 2017. If it can happen once, it can happen again!